Coach (COH 1.05%) is going through a challenging period as the handbags and accessories company is transforming its collection and restructuring operations to regain some traction among consumers. In this context, Coach reported earnings on Oct. 27, and the numbers provided reasons for optimism.
Improving sales
Total sales during the first quarter of fiscal 2016 came in at $1.03 billion, a small decline from $1.04 billion in the same quarter last year. However, constant currency sales did much better, increasing by 3% year over year.
The company is still facing declining sales for its Coach brand in North America, and this is materially weighing on overall performance. North American Coach brand sales decreased 11% on a reported basis to $561 million. Direct sales declined 12% on a dollar basis and 11% in constant currency, with comparable-store sales down 9.5%.
While Coach is clearly not out of the woods yet, the numbers in North America are showing sequential improvement. During the June quarter, Coach had reported a 20% decline in North America direct sales, with comparable-store sales falling 19%, so performance seems to be clearly moving in the right direction.
International markets are doing quite well on a constant currency basis. Coach brand international sales in U.S. dollars declined 3% to $369 million, while constant currency international revenue increased 6%. Total China sales rose 2% in dollars and 3% in constant currency, while sales in Japan jumped 6% on a constant currency basis and declined 10% in U.S. dollars due to the depreciation of the yen.
Management is quite optimistic on Europe, saying in its press release that Europe "remained very strong, growing at a double digit pace in both total and comparable store sales."
Sales from the recently acquired Stuart Weitzman business amounted to $87.5 million, while the segment produced an adjusted operating margin of 17.2% of revenue.
Competitor Michael Kors (KORS +1.62%) is scheduled to report earnings on Nov. 4, and investors may want to keep a close eye on Michael Kors' numbers in order to evaluate the competitive dynamics in the industry.
Michael Kors has gained significant share versus Coach over the past several years on the back of its popular brands and trendy designs. While growth has significantly slowed as Michael Kors gained size over the past several years, the company still delivered a vigorous increase of 13.4% in constant currency sales during the June quarter.
Margins and earnings
Profit margins are under pressure as Coach is streamlining operations, but Coach is still delivering solid profitability in comparison to other companies in the business. Gross profit margin declined from 69.3% of sales to 67.7%, still quite healthy considering that sales declined during the quarter.
Coach reported $0.35 in earnings per share during the quarter, with Stuart Weitzman accounting for $0.02 in earnings per share during the period. While this is a decline from $0.43 in the same quarter last year, it's really not that bad considering that Coach remains solidly profitable while going through its restructuring.
Moving forward
Management sounded quite optimistic about the company's performance in the coming quarters and the chances for a sustained turnaround. In the words of CEO Victor Luis:
We are excited to see our brand momentum building as we execute on our transformation. We enter the key holiday period confident that we will see continued improvement in our North American comparable store sales, driven by a strong assortment of gifts and new fashion handbags across all channels. In addition, our international businesses, notably in Europe and Japan, will continue to benefit from both strong domestic and tourist shopping trends.
The company also reaffirmed its guidance for the current year. Management expects Coach brand revenue to increase in the low single digits on a constant currency basis during fiscal 2016, and gross margin for the Coach brand is forecast to be in the neighborhood of 70% on a constant currency basis.
Importantly, Coach brand inventory declined by 9% year over year during the quarter, so management seems to be making the right merchandising decisions and moving inventory rapidly from the shelves. This is an encouraging sign when evaluating Coach and its chances for a successful transformation over the coming quarters.
